A Property Theory of Corporate Law

Abstract

The dominant view of the corporation in legal scholarship is contractarian, one that sees the corporation as a “nexus of contracts” among the various suppliers of inputs to the business, such as investors, creditors, and employees. According to this view, the holders of common stock—those who are traditionally the primary focus of corporate law—are not the owners of the corporation, but just one of many contractual claimants. As a result, the corporation is a free-floating nexus of contracts with no property interests in the corporation itself or its assets. Thus, corporate law is seen as essentially a specialized branch of contract law. The contractarian metaphor has largely persuaded the academy and much of the corporate law bench, evidenced by the regularity in which Delaware courts interpret charter documents as “contracts.” Courts and commentators alike regard corporate law as essentially a set of “off-the-rack” contractual default rules provided by the state. Yet the contractarian metaphor has struggled to account for some of the most fundamental features of corporate law. For example, the nexus of contracts view fails to adequately explain why fiduciary duties attach uniquely to shareholders and not to other contractual claimants on the corporation. Equally important, the nexus of contracts approach also fails to account for the many in rem features of the corporation that contract law could not easily replicate. There is a piece missing in the contractarian account of the corporation. This Article argues that property law provides the missing piece of the contractarian puzzle in demarcating the boundaries of corporate law and explaining the distinctive features of it. In the property theory, the corporation is an ownership structure—a device for turning a messy set of in personam claims into an orderly package of in rem property rights, called “shares.” The in rem structure depersonalizes these rights, allowing them to be divided and transferred without contractual assent and without entangling the personal attributes of the holder. The key to the proprietary nature of this ownership interest is the residual control—voting rights—that solidify the status of common stock as a property interest rather than a contractual interest. The property theory’s assertion that claims on the corporation are a mix of property and contract rights provides traction in otherwise slippery areas of corporate law. If there is a line to be drawn between contract and property, this dividing line identifies the boundaries of distinctively corporate law from contract law. Accordingly, the rationale for shareholder-only fiduciary duties is not primarily that shareholders are the residual claimants in the economic sense, but that they have a residual control right constituting an ownership interest unique among corporate claimants. The property theory of corporate law best explains many features of corporate law and clarifies otherwise murky line drawing exercises in defining the scope of fiduciary duties.